Fixed Plant Capacity

My group is about to start a new company that will enter the international microcomputer business.
In order to get our new company off the ground, the members of the executive team, (including myself) will need to provide the seed capital (investment money). This is the money that we will use for all the initial expenses related to starting up our company.

Within the first year, we will invest 4,000,000. ($1,000,000 each quarter). Our firm will issue 40,000 shares of common stock to the other members of the executive team at 100 per share in exchange for the 4,000,000 investment.

"Our manufacturing for this quarter is planned to be 25 units per day with the capital costs per unit totaling $24,000. This manufacturing strategy allows us to retain cash at the end of the quarter. We will also have sufficient cash on-hand if problems arise".

This was the professor's comment:

"You are building a plant with a fixed capacity of 25 units per day. When you operate the plant in Q3, you will set an operating capacity that is limited by the fixed capacity".

Do you think we should start with 50 units per day instead of 25 - fixed plant capacity?

Please advise.

Solution Preview

You will not be able to start with 50 units per day because the investment in the first year is $1,000,000 per quarter. The plant will need to start with 25 units per day for the first quarter. However, the ...